A 20% tax deduction can sound like a big win for business owners. But the upside could shrink fast if your taxable income crosses certain limits. The Qualified Business Income deduction, also called the QBI deduction, may lower taxable income for many pass-through business owners. The actual benefit, or lack of one, often depends on income bands and business type. Missing or misreading the phaseout rules can lead to surprises at tax time.
This guide breaks the ideas into clear steps so the path to understanding QBI feels less technical and more practical.
📌 Also read: Top 20 Tax Deductions Every Freelancer Should Know for 2026 Taxes
2026 Phaseout Thresholds by Filing Status
The QBI deduction does not switch off all at once. It reduces in stages once taxable income crosses a set range. The size of the deduction, if any remains, depends on filing status and income level. If income is below the phase-in start, the potential 20% QBI deduction may generally apply in full. Once income enters the phaseout range, the deduction begins to shrink. Past the upper limit, the deduction is zero.
📝 Note: These thresholds are based on taxable income, not business revenue or gross income.
| Filing Status | Phase-In Range (Taxable Income) | Deduction Fully Phased Out Above |
| Single or Head of Household | $203,001 to $272,300 | $272,300 |
| Married Filing Separately | $203,001 to $272,300 | $272,300 |
| Married Filing Jointly | $406,001 to $544,600 | $544,600 |
📌 Source: Qualified business income deduction | IRS
If income falls inside the phase-in band, the deduction usually reduces gradually instead of dropping to zero at once. For non-SSTB businesses, there is another layer that can still preserve part of the deduction. The amount hinges on wages paid and certain business property costs. This rule is known as the wage-and-property test.
Wage-and-Property Test Mechanics
Once taxable income crosses the lower phase-in threshold, non-SSTB businesses could still qualify for a partial QBI deduction. The IRS applies a limit based on the greater of these two calculations:
✅ 50% of W-2 wages paid by the business, or
✅ 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified business property
UBIA generally refers to the original cost of depreciable assets the business still owns and uses.
These formulas act like a safety valve. They may protect part of the deduction as income rises through the phase-in range. But the protection shrinks as income gets closer to the top of the band. Once income exceeds the cap, the wage-and-property calculations no longer apply because the QBI deduction is fully phased out.
The wage side favors businesses that pay consistent W-2 wages. The property side may help businesses that own equipment, machinery, or other qualifying depreciable assets. Payroll increases, new equipment purchases, or changes to filing status could potentially shift the outcome. Results vary based on income timing, business structure, and how wages or property are owned. The benefit is not guaranteed.
📝 Note: This test applies only to non-SSTB businesses. Specified service trades or businesses follow different phaseout rules, which come next.
What Counts as an SSTB
The IRS treats certain businesses as Specified Service Trades or Businesses (SSTBs) under Section 199A. These activities rely heavily on personal skill, knowledge, or reputation. If a business fits into this category, the QBI deduction could phase out faster at higher taxable income levels.
SSTB status is based on what the business does, not its legal structure. A single owner, partnership, S-Corp, or multi-member firm can still fall under SSTB rules. Below are common SSTB categories in plain terms. This is not a full legal list, but it can help identify the most likely cases.
✅ Health – doctors, dentists, therapists, psychologists
✅ Law – attorneys, paralegals, mediators
✅ Consulting – strategy, business, management, marketing advisors
✅ Performing Arts – musicians, actors, directors
✅ Athletics – coaches, pro athletes, sports agents
✅ Financial Services – investment advisers, brokers, wealth planners
✅ Accounting – tax preparers, CPAs, bookkeeping providers
✅ Actuarial Science – risk analysts, actuaries
✅ Brokerage Services – stockbrokers, real estate brokers (not agents who only arrange financing)
✅ Reputation-Based Income – public figures earning from name, likeness, endorsements, or personal brand services
📝 Note: Businesses in engineering or architecture are not SSTBs. They follow standard QBI rules, even if they provide design or planning services.
These categories do not mean a business automatically loses the QBI deduction. They indicate that the phase out rules tighten sooner once taxable income reaches certain levels.
Handling Mixed or Ancillary Activities
Many companies do more than one type of work. Some revenue may come from SSTB services, while the rest comes from non-SSTB work. This split matters because non-SSTB income could still remain eligible for QBI if it is tracked separately.
The IRS allows a business to carve out the non-SSTB portion when it stays within these thresholds:
✅ 10% or less of gross receipts if total revenue is $25 million or lower
✅ 5% or less of gross receipts if total revenue is above $25 million
If SSTB revenue exceeds those limits, the entire business is treated as an SSTB. That treatment could remove QBI eligibility at higher income levels.
Clear recordkeeping matters here. Separate invoices, distinct cost tracking, and activity-based time logs can help support the claim that part of the business is non-SSTB.
✏️ Hypothetical Example:
A design firm offers architecture services and small branding consultations. The architecture side is not SSTB. The consulting side is SSTB. If consulting revenue stays under 10% of total receipts and the firm keeps separate financial records, the architecture income could still qualify for QBI.
📝 Note: If income streams are blended without clear records, the IRS may treat everything as SSTB.
3-Step Self Check and Post-2026 Outlook
Before opening Form 8995, it can help to confirm that the QBI deduction is actually an option. Not every business structure or income type qualifies. Taxable income level also matters. A quick self check can help narrow the answer without running full calculations yet.
Step 1 — Check if the business is a domestic pass through.
QBI rules apply to many pass-through business types. Examples include:
✅ Sole proprietorships reporting on Schedule C
✅ Rental activities reported on Schedule E
✅ Farms reporting on Schedule F
✅ Partnerships and S corporations
Income earned through a C corporation does not qualify. Income from services performed outside the United States also does not qualify.
📝 Note: The deduction applies to the business, not the owner personally. The owner’s taxable income level then determines the phaseout result.
Step 2 — Compare 2026 taxable income to the phaseout ranges.
Taxable income determines how much QBI deduction may remain. The current 2026 phase-in ranges are:
| Filing Status | Phase-In Range | Fully Phased Out Above |
| Single, Head of Household, Married Filing Separately | $203,001 to $272,300 | $272,300 |
| Married Filing Jointly | $406,001 to $544,600 | $544,600 |
If taxable income is below the lower number, the potential 20% deduction may generally apply in full.
If income falls within the range, the deduction could shrink.
If income is above the top of the range, the result depends on business type:
❌ SSTB businesses typically phase out completely
✅ Non-SSTB businesses can still qualify, but only under the wage and property test
Step 3 — Estimate the wage, property, or SSTB limits
If taxable income lands in the phase-in zone, the next question is how much deduction may survive. For non-SSTB businesses, the deduction is limited to the greater of these two:
✅ 50% of total W-2 wages paid by the business
✅ 25% of W-2 wages plus 2.5% of the UBIA (original cost) of qualified business property
For SSTB businesses, the result changes. The tentative QBI amount is adjusted using the phaseout scale on Schedule A of Form 8995-A. Once income passes the upper limit, the QBI deduction for an SSTB is zero, even if wages or property are high.
📝 Note: Wage or property planning could potentially influence results for non-SSTB businesses, but this does not apply the same way for SSTBs at higher incomes.
What Changed After 2026
The QBI deduction no longer has the original 2026 sunset date. It became permanent under new legislation enacted on July 4, 2025. This means Section 199A is not scheduled to expire. Even so, future updates to wage calculations, definitions, or limits are still possible. Tax law changes tend to evolve in stages, not all at once.
📝 Reminder: A permanent rule is not always a fixed rule. Scope, formulas, and thresholds may still change.
Key Takeaways
The QBI deduction is not guaranteed, and results vary by taxpayer and business type. A practical next step is to run a quick estimate using Form 8995 or 8995-A before filing. Save the worksheets in case you need them again.
If the business has mixed income types, keeping separate records could help support what qualifies. Checking updated thresholds each year may also help reduce surprises.
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